Is China serious about reform?

FORTUNE — China’s Communist Party is spending this weekend in meetings. Important ones, maybe even historic, or at least so say the state press. The four-day event that starts Saturday in Beijing is officially called the Third Plenary Session of the 18th Communist Party of China Central Committee, a mandatory retreat for the country’s top 200 or so communists.

New party members, including President Xi Jinping, rose to power in the past year and spent their first two plenary sessions mostly on personnel changes. That’s why the big buildup to the third, which has historically produced the kind of economic events that are credited with propelling the country forward, such as Deng Xiaoping’s ascension to power at the 1978 session.

China’s state-run press is telegraphing big reforms on corruption, free markets, and the environment. The official Xinhua news agency wrote this week that the Third Plenary “is expected to steer the country into an historic turning point and transform its growth pattern.” China Daily carried a front-page story over the weekend about Chinese Premier Li Keqiang’s push to liberalize local governments. And the newspaper today ran the banner headline: POLLUTION TO EASE IN FIVE TO 10 YEARS.

But it all looks optimistic. There’s the Party’s message, and then there’s the Party’s actions. And so far President Xi’s term has been marked by a notable move toward conservatism. Major political reforms haven’t happened despite early chatter about his reformist ways. Instead, state media have investigated multinationals like Apple AAPL for patent infringement, Starbucks SBUX for price gouging, and GlaxoSmithKline GSK for bribery. Moreover, pollution is reaching crisis levels in the country’s north, and the government is still talking about fixes being at least five years away. Predicting drastic reforms from the new government seems unrealistic, especially after a year in which the same government has reacted cautiously to the country’s problems.

Of course, it may be impossible to know what happens over the weekend, because the news is treated as a state secret. No cameras are let in, no reporters, no speech transcripts distributed ahead of time — the polar opposite of an American president’s State of the Union address.

For now, observers can only read the prognosticators, hope that China takes steps to address its growing problems, and take comfort in knowing that the country is determined to grow GDP at least 7.2% a year at a time when much else remains unclear.

China’s tragic crackdown on social media activism

FORTUNE — Social media in China, which has nearly 600 million users, has long been recognized as a political game-changer. In a country where a one-party regime maintains tight censorship over traditional media, the relative freedom of expression available via Chinese social media, particularly Weibo (the Chinese equivalent of Twitter), has made it a powerful platform for rallying public opinion.

In the past few years, Weibo has been credited for exposing corrupt officials, mobilizing the public against social injustices, and forcing local governments to abandon plans for building hazardous plants in densely populated areas.

The demonstrated potency of China’s emerging social media has left many wondering whether the ruling Chinese Communist Party (CCP) will continue to tolerate it.

Judging by the recent ferocious crackdown launched by the Chinese government, the answer is clear: The new leadership, which has been in office for 10 months, is implementing a comprehensive plan to eliminate the threat represented by China’s social media.

So far, the campaign has resulted in the arrests of several leading online commentators, each of whom used to have tens of millions of loyal followers on Weibo. On August 21, police in Beijing detained Qin Huohuo and Yang Qiuyu, two well-known Big-Vs (online commentators with verified large followings), on charges of rumormongering and defamation. Two days later, police in Suzhou arrested Zhou Lubao, another online muckraker famous for spotting an expensive watch worn by a smiling official inspecting the site of a horrendous traffic accident a years ago (ironically, Zhou’s arrest coincided with the trial of the corrupt official). Zhou was accused of blackmail and rumormongering.

Then, on August 25, the Chinese government dropped a real bombshell. Its police arrested Charles Xue, a wealthy Chinese-American investor with more than 12 million online fans. Xue, an outspoken crusader against corruption and social injustice in China, was allegedly caught with a prostitute in Beijing.

What makes these arrests notable — and disturbing — is that they were preceded by emphatic official announcements by China’s top leadership that the party would tighten its ideological control and followed by a strong endorsement by China’s legal authorities on the validity of prosecuting individuals for online rumormongering and defamation.

On August 19, before the latest arrests, China’s President Xi Jinping gave a speech at the party’s conference on propaganda. He pledged that the party would never cede control over ideology. After these arrests were made, China’s supreme court and prosecutor’s office issued an unusual joint legal opinion that essentially affirms that online rumormongering is a serious crime that local authorities can prosecute.

The party’s war on social media reveals many things, most notably the political orientation of the new leadership. Before it assumed office last November, there were hopes that the Communist Party’s new leaders would be more tolerant and open. Their actions suggest they are more conservative, insecure, and obsessed with instability than their predecessors.

The crackdown will also doom the new leadership’s much-hyped campaign against official corruption. Experience around the world demonstrates that the most effective weapon against corruption is transparency and free speech. Indeed, China’s social media has played a critical role in exposing many corrupt officials in recent years. The vigilance of China’s online muckrakers has reached such a fearsome level that few Chinese officials now dare to display those expensive watches and other bribes in public. By prosecuting online activists, the party has essentially given corrupt officials a license to persecute whistle-blowers at will.

Apparently, the new leadership’s strategic thinking is “killing chickens to warn monkeys.” By prosecuting a few leading commentators, the government hopes to silence the majority and tame the country’s social media.

To be sure, the harshness of the offensive against social media could intimidate China’s people into submission. But such success is likely to be short-lived. Like all government-sponsored campaigns, the attack on social media will lose momentum at some point because the party will have other fires to put out, thus creating an opportunity for social activists to return to this space.

Fighting a war against social media is like trying to squeeze a balloon: The government may succeed in taming one part, but it simply pushes social activists to other spaces and forces them to be more innovative in fighting Chinese censors.

Eventually, the party will lose this war. But by waging a futile and repressive campaign against transparency, the party will only destroy innocent lives and hopes. That is the real tragedy.

Minxin Pei is the Tom and Margot Pritzker Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States

J.P. Morgan and the pitfalls of hiring China’s elite offspring

FORTUNE — Does it pass the smell test? Every senior executive at a large multinational company in China is likely asking this question amid reports that the U.S. Securities and Exchange Commission is investigating J.P. Morgan Chase’s JPM hiring of children of senior Chinese officials in connection with some of its China-related investment deals.

The answer is no. Even if the SEC clears J.P. Morgan of any wrongdoing, the damage to the reputation of the American banking giant will be irreparable. Of course, should the outcome of the investigation go against J.P. Morgan, the legal costs and penalties could be substantial.

Sadly, J.P. Morgan is not alone in hiring princelings — children of senior Chinese officials — in the cutthroat investment banking market in China. Other Western investment banks have used the same tactic in trying to win business in China. To be fair, these firms are stuck between a rock and a hard place in China. The country is run by a one-party regime that has created a hereditary political aristocracy well-versed in the art of turning power into personal profits. The Chinese ruling elite also knows how to capitalize on the fierce competition among Western firms. Because investment banking is now largely a commodity business (quality differentiation is minimal), Chinese officials who make decisions on lucrative underwriting mandates take into account other factors.

Since demanding an outright bribe from Western banks is most likely to be rebuffed, thanks to the Foreign Corrupt Practices Act, Chinese officials weigh whether the banks can do something for their children. Over the last decade, when the Chinese economy was booming and many giant state-owned enterprises floated their shares in Hong Kong, a decisive factor in determining which Western bank got the underwriting mandate was its political connection.

As a result, Western banks rushed to hire well-connected Chinese individuals who could help them win these lucrative deals. The hottest prospects were invariably the princelings. They were thought to be the most effective tool to influence Chinese decision-makers.

Although some of the princelings managed to deliver coveted deals, it is doubtful that hiring them worked like a charm each time. Nearly all the investment banks competing for Chinese deals have resorted to this tactic, so they unwittingly abetted an unpredictable contest among China’s ruling elite. The children of senior Chinese officials working for these banks were merely proxies of their fathers, whose positions on the Chinese political food chain determined their ability to close deals.

Even if the lucky princeling should, through his father’s political clout, secure a deal from his competitors, his employer — the Western investment bank — could suffer nasty consequences. The losers would be motivated to exact retaliation. They could also reveal dirty secrets and create public relations disasters or huge legal headaches for the winner. If a princeling’s father falls from grace because of corruption, as is often the case with senior Chinese officials, the risks for a bank could be incalculable.

Given the enormous legal and reputational risks involved, one has to wonder why Western investment banks, J.P. Morgan included, have allowed this questionable practice to continue for so long. For one, Western regulatory and law enforcement agencies have been too lax. Such negligence may have reassured those who have hired princelings that their practice was safe. Another explanation is that hiring princelings was not really expensive. They function much like stock options. Their compensation may be high in nominal terms, but such sums come out to a pittance for a bank if it wins a multi-billion dollar deal. If the princelings fail to deliver, the bank can always cut them off.

Today, with J.P. Morgan under a harsh regulatory spotlight, Western investment banks and all multinationals doing business in China must rethink their exposure to China’s corruption risk. In the case of hiring princelings, these firms will need to institute new safeguards to protect their reputation and bottom lines.

One small step the banks can take is to institute a strict system of recusal. Princelings on their payrolls should not be allowed to work on deals in sectors overseen by their parents. This measure may not completely prevent these princelings from lobbying their parents on their employers’ behalf, but it can help reduce potential reputational and legal risks.

Western multinationals should also develop a code of conduct to reduce the incentive to hire princelings in the first place. If most Western firms pledge not to engage in a political arms race, everyone will be better off.

Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Foundation

Apple Genius Bar scalping: Why didn’t we think of that?

FORTUNE — When Wang Bin’s iPhone 4S developed a glitch, he went online to book a slot at the nearest Apple Store Genius Bar.

No luck.

Mr. Wang, a correspondent for the Beijing Morning News, soon discovered that every appointment at all three Beijing Apple Stores had been booked four weeks in advance.

They’d been snapped up by scalpers and were being resold online for anywhere from $1.60 to $6.50 apiece.

Wang, who published an account of his troubles on Monday, had a choice: He could either pay the scalpers’ prices or stand in line for up to four hours hoping for a cancellation.

Think of it as a 21st century illustration of what economists call the “tragedy of the commons,” whereby a shared resource — a rich fishing bank, a field for grazing cattle — is quickly depleted by individuals acting independently and in their own self interest.

This is not the first time Chinese scalpers have caused headaches for Apple AAPL. The launch of the iPhone 4S in Beijing was abruptly halted in January 2012 when the company’s barricades were overwhelmed by gangs of “yellow bull” scalpers bused in from the countryside.

Apple CEO Tim Cook is reportedly visiting China this week to smooth over a variety of issues. This one, however, is probably below his radar screen.

Bo Xilai indictment: China’s unsubtle warning

FORTUNE – Finally, the curtain is about to fall on the infamous Bo Xilai affair. The former party boss of Chongqing and a rising political star in China was unceremoniously purged from political office in March 2012. His wife has been convicted of murdering a British businessman and sentenced to a suspended death penalty, and Bo was accused of accepting bribes and engaging in debauchery (a crime by the nominally puritanical standards of the Chinese Communist Party).

Those familiar with how the Chinese Communist Party deals with its wayward officials have not doubted that Bo will receive severe punishment. The only question is whether his former colleagues and political rivals will give him a death sentence or send him to jail for life. The suspense will soon be over.

The Chinese government has just announced that Bo has been formally indicted. Based on Chinese legal procedure, a trial will open as soon as 10 working days after the accused receives the indictment. So it is almost certain that the Bo trial will be held in August.

The timing and the venue of the trial show that China’s leadership has done all it can to minimize further reputational damage. August is when most people are focused more on their holidays than politics. Media attention on the trial should be less intense. Since the party is about to convene an important central committee meeting this fall to unveil its economic reform package, having the Bo case dispatched will avoid any political distraction. To eliminate any possibility that Bo and his supporters might disrupt the legal proceedings, the trial will be held in Jinan, the capital of Shandong province, far from Bo’s power base of Chongqing (where Bo’s crimes allegedly occurred).

Like previous corruption trials of senior party leaders, the Bo trial will be a secret one. Only his immediate family members and lawyers will be allowed inside the courtroom. The press will be barred. The proceedings will be covered only by the official Chinese news agency, Xinhua.

In all likelihood, we will learn a bit more about the details of Bo’s alleged crimes. The indictment, which has been leaked to the press but not officially published, accuses Bo of accepting $3.25 million in bribes, embezzling $815,000, and abusing his power. At the trial, the evidence presented by the prosecutors will give us a glimpse of corruption at the highest levels of Chinese government. Since this event has “show trial” written all over it, we should have no doubt about Bo’s conviction. What’s unclear is how he will be punished.

Had Bo been a lesser party official, corruption on this scale would guarantee the death penalty (the Chinese government determines punishment on the basis of the amount of the bribes). However, Bo was a member of the Politburo, a position that gives him plenty of political privileges but no bulletproof immunity (which only members of the Politburo Standing Committee enjoy — none of them has ever been prosecuted since the end of the Cultural Revolution). Prior to Bo’s ignominious fall, two other members of the Politburo convicted of corruption drew, respectively, a 15-year and an 18-year sentence (both were out on medical parole after serving roughly half of their terms).

Based on the party’s implicit rule of not executing Politburo-level officials, Bo will not get a death sentence. However, the party also wants to send a message. His rivals would like to see him receive a suspended death penalty (which will ensure that he stays in jail for 15 years, an effective political death sentence). His supporters (who still have strong influence in the party) would prefer a long jail sentence that could be shortened quickly through medical parole.

With the announcement of Bo’s indictment, it is a foregone conclusion that the party’s top leaders have agreed on Bo’s punishment (the presiding judge will have no authority to decide). Given the intensity of the ongoing anti-corruption drive launched by Xi Jinping, China’s new leader, it is very likely that Bo will receive a suspended death sentence. Anything less will damage the credibility of Xi’s efforts and raise questions about his authority.

It would be a mistake to see Bo’s punishment as a message to other corrupt officials, though. By putting Bo on a show trial, the Chinese Communist Party wants to accomplish two political objectives. Its more immediate and pragmatic goal is closure. By all accounts, the Bo scandal has devastated the party’s prestige and legitimacy. Beijing wants to put this sordid affair behind. The longer-term objective is to send a powerful but subtle warning to the party’s 86 million members: The party demands absolute and unconditional obedience, and overly ambitious officials trying to get to the top by unconventional means will end up like Bo.

For Bo, who scared his colleagues with neo-Maoist tactics, barely disguised political ambition, and ruthlessness, such a warning obviously came too late.

Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States

Glaxo and the peril of doing business in China

FORTUNE — “If you walk along the river often,” the Chinese are fond of saying, “you cannot avoid getting your shoes wet.” This aphorism refers to the difficulty of staying clean in a corrupt culture. GlaxoSmithKline GSK, the Western pharmaceutical giant recently accused by the Chinese government of engaging in a massive bribery scheme in the country, seems to have fallen headlong into the dirty water.

Of course, at this stage, we are hearing only one side of the story — the allegations against GSK by the Chinese police. So it would be prudent to withhold judgment on this specific case.

Nevertheless, the allegations against GSK raise two important challenges for Western multinationals eager to take advantage of China’s fast-growing consumer market. The first one is how to survive in an environment with unclear rules, anti-market government policies, and local competitors habitually engaging in unethical or outright corrupt practices. The second one is how to ward off protectionist measures once you become successful and gain a significant share of the Chinese market.

As for the first question, GSK has the good fortune of being in the right business (there’s significant demand for Western pharmaceuticals in China) but the bad luck of having to work in a health care system with a dysfunctional financial model that forces honest people to be crooks. Judging by the numbers, the Chinese health care sector, a roughly $400 billion market expected to reach $1 trillion by 2020, is one no Western pharmaceutical firm can afford to ignore. Sales of pharmaceutical products in China in 2012 reached $82 billion, including roughly $10 billion of which were imported drugs. Western pharmaceutical firms, which also have over 1,500 joint ventures in China, have gained enormous market share with both imports and locally manufactured drugs. In most large cities, they account for 60-65% of the sales.

Unfortunately, Western pharmaceutical firms must live with the dark side of the health care industry in China. Unique in the world, the Chinese government has opted for a financing model that relies on high drug prices to subsidize health care. There are three income streams for public hospitals: government appropriations, medical services, and prescription drugs. The government provides only 10% of the budget of Chinese public hospitals. To make health care accessible, the government keeps the prices of medical services very low. Hospitals lose money providing such services. To keep hospitals afloat, Beijing allows them to charge high prices on prescription drugs. As a result, income from prescription drugs accounts for 40-50% of a public hospital’s income in the cities and a much higher percentage in the countryside.

This financial model pushes up health care costs (through excessive prescriptions) and encourages corruption. To get a piece of the lucrative market, pharmaceutical firms have resorted to bribing doctors to prescribe their products. GSK, which is apparently subject to more strict internal rules, opted to travel a tortuous route, according to China’s allegations: holding fictitious conferences that reimburse doctors’ non-existent travel expenses.

GSK, with its checkered history of corruption scandals, seems to deserve little sympathy. However, given the pervasive corruption in Chinese society and the irrational health care financing model, GSK — along with other Western pharmaceutical firms — may have little choice but to dip into murky waters – unless they stay far away from the proverbial river of profits of China’s burgeoning health care market.

For most Western firms, the second issue raised by the GSK case is far more relevant and alarming. The way Chinese authorities are cracking down on widespread corruption in the pharmaceutical industry suggests that they are selecting their targets discriminatively and may have a protectionist agenda. GSK may have committed bribery in China, but so have its Chinese competitors, many of whom perpetuate even more brazen forms of bribery. But why is Beijing only singling out GSK, a dominant Western firm in the sector?

If we look at how well Western firms have fared in China once they have gained significant market share, we may detect a worrisome pattern. They face unfair scrutiny from Chinese authorities and are often penalized for the same infractions for which their Chinese competitors suffer no consequences.

The most recent example of this pattern is the Chinese government’s anti-trust investigation of Western baby formula makers like Wyeth and Nestle in China. Tainted baby formula made by Chinese dairy firms has destroyed these Chinese company’s brands and sales, allowing Western baby formula makers to claim a huge market share. What’s the reaction of Beijing? Instead of enforcing tighter food safety rules on Chinese baby formula makers, they are attempting to hurt Western firms. The victims will be Chinese babies denied safe nutrition.

Also consider Yum Brands YUM, which runs the wildly popular KFC franchise in China. A few months ago, KFC sales in China plummeted after press allegations of the use of antibiotics in the chickens it sold. KFC’s Chinese competitors, which adhere to less rigorous food safety standards, were spared.

If there is one valuable lesson to be drawn from the unfolding GSK corruption scandal in China, it is that Western multinationals ought to increase the risk premium for doing business in China and have careful plans in place for managing both routine risks and crises, lest they fall into a river of business muck.

Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States

The lowdown on China’s slowdown: It’s not all bad

FORTUNE — For China, 2013 is becoming the year of the credible shrinking GDP growth target. Earlier in the year, the old 8% norm was shaved down to an official estimate of 7.5% by China’s State Council. Last week, Finance Minister Lou Jiwei moved that to 7%, and said an even lower number was possible.

China’s slowdown is real — but relative. While President Xi Jinping has told China’s officials to worry less about GDP and more about quality of life, investors still focus on the crude indication. The official target of a 7.5% increase would already have created China’s slowest growth since 1990. The official acceptance of a lower number shows that the old received wisdom — anything below 8% puts China at risk of rising unemployment and social unrest — has been discarded.

For China-watchers, 6% growth sounds bizarre. It was not that long ago that double digits were normal. But by the standards of the other middle-income countries, China is still doing exceptionally well. The International Monetary Fund expects 3% GDP growth this year in both Latin America and the Middle East.

It has three causes. First, demand for exports from China is slowing. June’s 3% decline is especially weak, but the average increase over the last twelve months is the slowest rate since the beginning of 2010. A strong currency hurts, as does weak demand. But as China gets richer, it’s natural that the currency rises and that exports based on cheap labor fade away.

Second, economic gravity is catching up. The Chinese workforce is no longer increasing and the pace of urbanization is slowing because so many people have already left the farms. Of more concern is the decreasing efficiency of investment. A few years ago, only one yuan of investment was needed to add a yuan to GDP. Now it takes almost four yuan.

Finally, the authorities are not trying to fight gravity. The government knows about stimulus; it did a huge one in 2009. With a fiscal deficit of just 2% of GDP and total control of the big banks, it has the means. It also controls the statistics, so can basically report whatever number suits. Clearly, the authorities are comfortable with lower GDP growth numbers.

China’s growth has been fueled by borrowing. But there’s no sign that the slowdown has been created by a credit crunch. The official effort to rein in “shadow banking,” loans that do not appear on banks’ books, may hurt; and total social financing, the government’s favored measure of new money pumped into the economy, has come down recently. But the six-month average of social financing, a good measure of what’s affecting GDP today, is rising.

Still, there’s a monetary problem. Because profitability is falling and leverage has risen, companies have to put more of their profits into servicing debt and less into investment. The government does not seem too bothered. Officials seem to have learned the lesson of the last stimulus: mandated mega-lending leads to wastage and recklessness.

The key issue is not pace of growth, but the effect on society. There is a good argument that by that standard China’s recent growth has been too fast. The all-out pursuit of more production led to grave environmental degradation and probably encouraged a lax attitude towards corruption.

A slower-growing economy could allow for more investment in things that make China a happier, healthier place over the long run. Those would include cleaner production, genuine innovation and human capital. But some recently announced projects — the world’s largest free-standing building, the longest under-sea tunnel, a flamboyant space program — suggest old habits die hard.

Investors’ talk of a hard landing in China is unhelpful. Even GDP growth of 2% a year would be quite acceptable, as long as employment remained adequate and social unrest low. Conversely, 7% growth with a spike in labor-related protests and bankruptcies would be tough.

Perhaps the best test of a hard landing is whether the authorities appear to remain in control. Deducing that is largely a question of parsing political rhetoric. It’s encouraging that Premier Li Keqiang says growth hasn’t fallen below the minimum acceptable rate, whatever that is.

What seems most likely is that policymakers are biding their time. The tools they have — forced lending, currency depreciation, vast infrastructure mandates — are powerful but they are also rough, and come with uncertain consequences. For now, the mentality of “best left alone” looks about right.

China and Africa: What the U.S. doesn’t understand

FORTUNE — Over the weekend U.S. President Barack Obama, on a three-country visit to Africa that concludes tomorrow, denied that America felt threatened by China’s rising influence on the continent.

Cue the eye-rolling.

Recent stories published by CNN (“Obama’s Goal in Africa: Counter China”), the Financial Times (“Obama’s trip to Africa is too little – and very late”), and the GlobalPost (“Obama in Africa: China 1, US 0”) share a theme: While American administrations dithered, or were tied up in Iraq and Afghanistan, the Chinese have been setting up shop in the 21st Century’s next great growth region.

Seven out of the world’s 10 fastest growing economies are African. According to a 2010 report by consulting firm McKinsey & Company, the rate of return on foreign investments in Africa was, in the first decade of this century, higher than in any other region. The International Monetary Fund (IMF) projected that Africa is now growing faster than Asia.

Sino-African trade volumes have grown accordingly. Negligible in 2000, trade hit $198.5 billion in 2012. By comparison, U.S.-Africa trade volume was $108.9 billon, and is slated to fall further behind: Research from Standard Chartered estimates that trade between China and Africa will hit $385 billion by 2015.

Dogged by criticism that Beijing is eating Africa’s lunch, China’s relationship with Africa is complex and too often distorted by myth. Here are five examples of how we tend to get it wrong.

“It’s all about oil”

Yes, Africa’s natural resources are important to Beijing. According to the Council on Foreign Relations, roughly a third of China’s crude oil imports come from sub-Saharan Africa. However, Chinese investment in Africa is far more diverse than some of the rhetoric suggests.

According to the Carnegie Endowment for International Peace, in 2009 only about 29% of China’s foreign direct investment (FDI) went to the extractive industries. By contrast, in the same year, mining accounted for about 60% of U.S. FDI to Africa. Meanwhile, China — which was called out last weekend by President Obama for not building enough plants in Africa — invested more in manufacturing, and in African jobs, than the U.S.

“The new kid in town”

While the past decade has witnessed dramatic growth in Sino-African trade, Beijing’s engagement in Africa is nothing new. The modern association between China and Africa stretches back to the 1950s, when the People’s Republic of China competed with Taiwan for recognition as the “real” China. As African states won independence — and would come to populate about a quarter of the UN’s membership seats — Beijing was anxious to isolate Taipei while building development relationships.

Deborah Brautigam, a Johns Hopkins China scholar, contends that Beijing’s “one-China” policy continues to shape its African investments. Aid is primarily a diplomatic tool. As a consequence, Beijing offers development aid of some sort to every country with which it maintains relations (oddly including countries, like South Africa, which has a higher per capita GDP than China). Aid is part of a historical and diplomatic narrative, not simply a stratagem for snapping up Africa’s resources.

“Africa for sale? Sold, to Beijing.”

One might have the impression of Beijing as evil mastermind: marshaling state resources for the colonization of Africa. From reading some reports, one might think that’s already happened. There are two points to make.

First, the scope of Beijing’s investments in Africa are often grossly embellished. Good numbers simply aren’t available. Beijing does not release aid figures, and China Exim Bank and China Development bank, the main lenders, publish no data. Most estimates are exaggerations, resulting from double counting and over-broad definitions that count all state-sponsored economic activity as “aid.” According to Brautigam, the AidData estimate that Chinese aid to Africa is around $75 billion — widely reported — is rubbish.

While China’s African aid data may be exaggerated, Brautigam writes that in 2010 the U.S. disbursed more in official finance to Africa than China. Furthermore, according to U.S. Government Accountability Office (GAO) data for 2007-2011, American FDI to the continent was bigger than Beijing’s.

Second, Chinese aid and investment actors are organizationally stove-piped. Often the left hand doesn’t know what the right hand is doing. Rather than acting in a unitary fashion, China in Africa is made up of many little actors. And those actors don’t coordinate aid-investment policy. In other words, China doesn’t build a hospital to win a mining concession.

This is not to say that Chinese dealings in Africa should be generalized as benign — only that it’s hard to generalize at all. The spectrum of Sino-African interactions is broad. It ranges from a Chinese commitment to build dozens of malaria clinics across the continent, to Chinese managers opening fire on protesting miners in Zambia. In Africa, China has many faces.

“Patron of pariah states”

One of those faces: patron of authoritarian regimes. Beijing has a reputation for supporting tyrants much of the West wouldn’t touch. For its part, Beijing invokes a “non-interference” policy to excuse itself from domestic entanglements. Non-interference is a fiction — while one may claim neutrality, investment always props up, insulates, and enriches the elites.

Yet the West should be careful of invoking a double standard. As documented by the Human Rights Watch, Ethiopia — an autocratic, one-party state — has not only been supported by Western aid, but used that aid as a tool of oppression: by withholding it from dissenters and non-party members.

Even where Western donors, like the World Bank or IMF, make loans conditional on good governance, Western trade and investment actors are more freewheeling. Unless official sanctions prevent them from doing so, American and European commercial banks extend loans where they see an opportunity for profit. Such loans do not hinge on good behavior.

“Those poor, helpless Africans”

Africans are not passive victims. Often they are savvy brokers and, in their dealings with Beijing, secure good deals. When they can, they shrewdly play outsiders against one another. For example, there is abundant international competition in resource-rich Angola, whose president famously warned his Chinese counterpart, “You are not our only friends.”

Occasionally, perhaps, African states get the short end of the stick — yet more often it seems they are simply overwhelmed by the volume of new business. As the Economist recently reported, rules in African countries may exist to protect workers and the environment, but institutions are often too weak to enforce them. Undoubtedly, some Chinese entrepreneurs take advantage, and occasionally that results in violent flare-ups, as it did last year over illegal mining in Ghana.

Yet despite concerns that Beijing antagonizes locals, there is no data to suggest xenophobia in Africa is on the rise. Reports that Chinese firms don’t hire African workers appear to be unfounded. And while extensive polls are not regularly conducted, a 2007 Pew Center Research survey found that in a range of African countries — Ivory Coast, Mali, Kenya, Senegal, Ghana, Nigeria, Tanzania, and Ethiopia — between 67% and 92% of respondents held a favorable view of Beijing.

Africa: Prepped for Takeoff

This one isn’t a myth. By many estimates, including a recent study by the World Bank, Africa is primed for impressive economic growth. After decades of poor health, epidemic underdevelopment, and political instability, the continent may finally be positioned to join the global economy. This would be cause for celebration. And regardless of the U.S.’s role in Africa’s rise, we can surmise this: Beijing is committed to be more than a spectator.

China’s banking mess: It’s the politics, stupid

FORTUNE — The worst credit squeeze in China in recent memory seems to be over. After the People’s Bank of China (PBOC), the country’s central bank, issued a reassuring statement on June 25 that dispelled investors’ worries about the lack of liquidity in China’s interbank loan market, Chinese stock markets halted their plunge, and the rates of China’s interbank loans fell from over 20% to around 6% (still two to three times greater than the average rate before the recent panic). China’s Lehman moment, for now at least, appears to have been averted.

However, many questions remain, both about the causes of the recent turmoil in China’s banking system and the implications for the Chinese economy.

As for what prompted the recent seizing-up of China’s interbank loan market, there is no shortage of theories. The PBOC, widely perceived as having engineered an artificial credit squeeze to crack down on China’s shadow banking sector, has come out with innocent but not very credible explanations. It blames the panic on a set of coincidental factors, such as the June deadline for banks to report their numbers (a requirement that forces many banks to reduce outstanding loans and embellish their risk profiles), tax due dates at the end of May and middle of June (tax payments suck cash out of the circulation), and increased demand for cash before a traditional Chinese holiday.

An alternative explanation, popular mainly among economists and investors, is that the PBOC was engaged in a high-stakes game with players in China’s shadow banking system, all with the blessing of China’s new political leadership. Because interbank loans constitute the bulk of funding for borrowers in the shadow banking system, making such loans less available sends a powerful message that the central government will no longer tolerate risky behavior and keep inflating China’s credit bubble. Some analysts went so far as to suggest that this is the first shot fired by the Chinese government to signal the start of a deleveraging process.

There is a third explanation, which is simpler and perhaps more reasonable. This incident is most likely a botched response by the Chinese monetary authorities to a problem that has been long in the making but exploded without warning and caught them completely by surprise.

The growth of China’s shadow banking system (with estimated outstanding credits equaling roughly 10-15% of the balance sheet of the formal banking sector) has long been flagged as a source of risk in China’s financial sector. Chinese policy-makers are fully aware of the risky activities within this sector but have opted to do nothing because the system serves several useful functions and has powerful interest groups. Local governments, real estate developers, and private entrepreneurs unable to obtain loans from the state-owned formal banking sector can tap this system for funding by paying a higher interest rate. State-owned banks and investment companies pocket lucrative transaction fees by peddling wealth management products (WMPs) issued by borrowers to depositors chasing high yields. When this game is going well, a lot of rich and powerful people make money while risk builds up in the financial sector.

As with similar instances of financial recklessness, confidence can evaporate quickly, setting off a panicked exit from the market. Even sophisticated and capable regulators are often ill-prepared for such unforeseen and highly disruptive events. If we analyze the recent gyrations in China’s interbank loan market from this perspective, we may gain a better understanding of the causes behind the short-lived panic and avoid overreacting to or over-interpreting this event.

Granted, the opacity of the decision-making process, the lack of a free press, and the insensitivity of policy-makers to the need to communicate their intentions to market participants all contribute to the difficulty in making the right call on China. To avoid making mistakes in the future, analysts should do themselves a favor by focusing more on political factors than on economics. In the case of the recent upheaval in China’s financial system, the idea that the squeeze was deliberately engineered by the PBOC to crack down on the shadow banking system makes little political sense. Only the Politburo Standing Committee, the ruling Communist Party’s most powerful body, could have made such a decision. But the Politburo would not likely authorize such a move at this delicate moment.

The Communist Party is scheduled to hold its third central committee plenum in the fall, when its most important economic initiatives will be unveiled. It is inconceivable that the party’s leadership would risk economic turmoil and disrupt its plans with a bold move on the shadow banking system before they head to the beach for the summer.

To implement any kind of meaningful reform to the shadow banking system, Chinese leadership will first have to reach a consensus at the top, overcome resistance from interest groups, and devise complex plans to address the consequences of reform. All this takes time and fierce bargaining. Based on the quick retreat sounded by the PBOC, it is quite obvious that the top leadership has no such plans in place for now.

However, this does not mean that Beijing can delay dealing with the massive risks in the banking system for very long. If anything, the recent bloodbath in the Chinese financial sector should prompt China’s top leaders that they must have a more comprehensive plan for financial deleveraging when they meet in the fall. Otherwise, they are almost certain to face a bursting of China’s credit bubble that will make last week’s turmoil look insignificant.

Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States